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Locking in Investment Gains

Physicians have a healthy fear when it comes to investing. We all know that the game is rigged. But that doesn’t mean that we can’t profit from it in some way. Locking in investment gains is a way of making sure that you walk away with something real.

I invest in stocks and bonds and real estate, mostly long-term. Though in the beginning I’ve mostly lost money on these investments, in the past few years I’ve mostly profited.

One way of getting rid of the fear of investing is to lock in investment gains which investopedia describes as ‘realizing gains’. As in, once your portfolio has a profit, you cash it out – whatever cashing out means to you.

Rich on Paper

If you invest in a particular stock or a mutual fund, you might have a lot of gains on paper – or on the screen, whatever. But you don’t actually have those gains locked in.

That creates a little anxiety, for some. Maybe a little FOMO. You’re seeing all those zeros but don’t feel that you’ve locked in any gains.

I’m looking at my VTSAX index fund and it’s at an all-time high. I’ve got quite a bit of money invested in it. And not that I care what the current economic situation is like, but why not lock in some investment gains.

It’s simple enough to do. I’d sell off a portion of my VTSAX holdings and turn it into cash. I can use that cash to buy something else or hold some CD’s.

Asset Allocation

Obviously, that’s what you’re supposed to do with asset allocation rebalancing.

Let’s say you have 2 funds, a stock index fund and a bond index fund. If the stock one goes up then you sell the excess and buy more of the bond fund which may not have performed as well.

This keeps your asset allocation steady and it’s called portfolio rebalancing. There are good scientific reasons to do it.

Cashing Out

A few months ago I did something similar to this. I decided to sell off some of my investments and buy real estate with it. This was actual physical real estate, but many choose REITs or syndicated deals instead.

My portfolio of stocks and bonds had gone up enough that it had room for a little pruning. I could have cashed out the money and kept it in cash – that would have been fine as well.

Over a few years it’s unlikely for that cash to lose too much value. But I always feel like cash is too idle for me. I would rather invest my unused money.

It didn’t have to be real estate. I could have invested in something more secure like bonds or CD’s or a fixed annuity.

Locking in Investment Gains

The flipside to this strategy is that locking in investment gains isn’t really necessary. When you sell those appreciated stocks, bonds, or REITs, you will have a small tax obligation. And it also creates more work for you.

I’m not a full-time investor. I don’t want to constantly monitor my investments and babysit them. They don’t offer me enough return yet to make that worthwhile.

For the Retired Doctors

If you’re retired it makes more sense to take some of your investment gains and lock in those returns.

This is important because you don’t know how the economy will perform during your retirement. Having access to cash will prevent you from freaking out and making a bad investment decision.

That’s why converting some of my gains into real estate makes sense. I bought that cheap condo in Spain because I can see myself retiring there.

That purchase wasn’t just a real estate investment. But I also invested in a cheaper lifestyle. I can live in Spain permanently and live on <$1,000/month and enjoy a solid quality of life.

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